January 26, 2010
Submarket Dynamics and Innovation: The Case of the U.S. Tire Industry
Posted by D. Daniel Sokol
Guido Buenstorf and Steven Klepper write on Submarket Dynamics and Innovation: The Case of the U.S. Tire Industry.
ABSTRACT: Beginning in 1922, the rate of exit of U.S. tire producers increased sharply and the industry began a severe and protracted shakeout. Just five years earlier, the tire industry experienced a surge in entry that led to a rise of over 80% in the number of producers. We propose an explanation for this episode based on the idea of industry submarkets, which we incorporate in a model of shakeouts. We test this theory and alternative explanations for the surge in entry and exit and the shakeout using a novel data set on patenting in tires and production in the early 1920s of the cord tire, a key innovation we feature in our theory. Our analysis suggests that the development of a new submarket can open up opportunities for entry but also stimulate innovation and in the process reinforce the advantages of the leading incumbents, accentuating the shakeout of producers.
January 26, 2010 | Permalink
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